Private credit could address “several problems” in 401(k) plans, from overreliance on stocks and bonds to limited access to higher-income alternatives, which until now have largely been off-limits to defined contribution plans.
In August, US President Donald Trump signed an executive order allowing alternatives including private credit investments into 401(k) plans, a move set to benefit asset managers by opening the $12tn (£8.9tn) retirement market to alternative strategies.
Speaking to Alternative Credit Investor, Rob Wolfe, managing director and wealth management advisor at Apollon Wealth Management, said private credit could solve “several problems” defined contribution plans currently face.
He noted that a structural gap exists between what many 401(k) participants need from fixed income allocations and what public bond markets deliver. “Overall, client 401(k) portfolios remain heavily concentrated in public equities and core public bonds,” Wolfe explained.
Read more: Stricter US rules forecast amid 401(k) expansion
For long-term investors, Wolfe stated that senior secured private credit can complement to public credit, combining “higher contractual income with a senior secured position”.
From a portfolio construction perspective, he added, modest allocations to private markets in default options like target-date funds can improve outcomes without materially increasing risk. According to BlackRock’s recent work with Great Gray, purpose-built private market exposures implemented inside a custom glidepath could add approximately 50 basis points of performance per year to target-date funds, while maintaining an appropriate risk profile for retirement savers.
“I believe private credit is particularly well suited to this context because it naturally slots into the ‘return-seeking but income-oriented’ part of the glidepath,” Wolfe said.
Private credit can also help address longevity and sequence-of-returns risks. “A carefully sized allocation could provide an income stream that behaves differently from Treasuries and investment-grade corporates, particularly in environments where rates are volatile and public credit spreads are tight,” Wolfe explained.
Read more: Secondaries set to be main beneficiary of 401(k) inclusion
Regarding illiquidity, he noted that private credit’s long-term nature becomes manageable when delivered through a multi-asset fund, where liquidity is managed at the product level and the private credit sleeve represents only a small portion of total assets.
Others in the industry, such as Robert Stark, chief executive of Nomura Capital Management, see private credit’s illiquid, income-oriented nature as well-suited for retirement investors seeking enhanced diversification and return potential.
Stark pointed to fiduciary fear, rather than suitability, as the main barrier. As fees across active and alternative strategies continue to decline, he believes the net-of-fee compounding potential of private credit could play a “meaningful role” in closing the nation’s retirement savings gap.
Read more: Nearly half of US pension savers would invest in private assets
